Holiday Pleasure Tours is a small company that provides a two-week holiday package on a Ca ribbean

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Holiday Pleasure Tours is a small company that provides a two-week holiday package on a Ca¬ ribbean island. It is a member of the Association of Island Tour Operators, which is effectively a cartel that sets the prices for tourist packages in the Caribbean Islands. Holiday’s tour package involves air fare from New York, transfers, two weeks hotel accommodation, a rental car, and daily use of sailboats, snorkeling equipment, and so on. The cartel price for this tour is $1,600 per person, and Holiday’s current quantity demanded is 400 per month. Holiday is considering a secret discount, to be advertised in the New York Times travel section. A market research firm has estimated that Holiday faces a ceteris paribus demand curve specified by P = 2,000 — Q, following its conjecture that quantity demanded would increase by one unit for every dollar the price is reduced. Holiday’s cost function for this tour package is estimated to be TC = 50,000 + 400 Q + 0.25 Q2.

(a) Calculate Holiday’s monthly contribution at the current price and output levels.

(b) If Holiday were to set a lower price, what is the profit-maximizing price level, with ceteris paribus?

(c) What is Holiday’s expected contribution at the new price level?

(d) What issues would you consider before advising Holiday to go ahead with the price re¬ duction?

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